Audit Evidence

Audit evidence refers to the information obtained by the auditor in arriving at the conclusions on which the auditor's opinion is based. It includes information contained in the accounting records underlying the financial statements and other information. It is crucial because it enables the auditor to form a reasonable basis for expressing an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework, thereby reducing audit risk to an acceptably low level.

The reliability of audit evidence is influenced by its source and nature, and the circumstances under which it is obtained. Generally, audit evidence is more reliable when it is obtained from an independent source outside the entity, generated internally when the related controls are effective, obtained directly by the auditor, in documentary form (paper, electronic, or other medium) rather than oral, and provided by original documents rather than photocopies or facsimiles.

For inventory, as per SA 501, the auditor attends physical inventory counting unless impracticable, to evaluate management's instructions and procedures for recording and controlling the results of the count, observe the performance of management's count procedures, inspect the inventory, and perform test counts. For litigation and claims, the auditor obtains audit evidence by inquiring of management and, where appropriate, others within the entity, reviewing minutes of meetings, and examining legal expense accounts. The auditor also requests direct communication with the entity's external legal counsel.

Auditors use various procedures to obtain audit evidence, including: 1. Inspection: Examining records, documents, or tangible assets. 2. Observation: Looking at a process or procedure being performed by others. 3. External Confirmation: Obtaining a direct written response from a third party. 4. Recalculation: Checking the mathematical accuracy of documents or records. 5. Reperformance: Independent execution of procedures or controls that were originally performed by the entity. 6. Analytical Procedures: Evaluating financial information through analysis of plausible relationships among both financial and non-financial data. 7. Inquiry: Seeking information from knowledgeable persons within or outside the entity.

Sufficiency is the measure of the quantity of audit evidence, while appropriateness is the measure of its quality (relevance and reliability). The auditor must obtain sufficient appropriate evidence to reduce audit risk to an acceptably low level and draw reasonable conclusions.

Sufficiency refers to the quantity of audit evidence. The quantity of audit evidence needed is affected by the auditor's assessment of the risks of material misstatement and also by the quality of such audit evidence. Appropriateness refers to the quality of audit evidence, i.e., its relevance and reliability in providing support for the conclusions on which the auditor's opinion is based. Both sufficiency and appropriateness are interrelated and must be considered by the auditor.

If an auditor is unable to obtain sufficient appropriate audit evidence, it constitutes a scope limitation. As per SA 705, this may lead to a modification of the auditor's opinion. If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive, a qualified opinion is issued. If the auditor concludes that the possible effects could be both material and pervasive, a disclaimer of opinion is issued, indicating that the auditor does not express an opinion on the financial statements.

Written representations, as per SA 580, are written statements by management provided to the auditor to confirm certain matters or to support other audit evidence. They are obtained when the auditor determines that they are necessary to obtain sufficient appropriate audit evidence regarding specific assertions, or when other audit evidence is expected to be available but cannot be obtained. They are not a substitute for other audit evidence that the auditor could reasonably expect to obtain. Circumstances include confirming management's responsibility for financial statements, completeness of information provided, and specific assertions where objective evidence is limited (e.g., intent to hold investments).

Analytical procedures involve evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. As per SA 520, they are used as substantive procedures when the auditor identifies relationships that are expected to exist and remain consistent over time, or when they are predictable. Their application involves comparing the entity's financial information with comparable prior periods, anticipated results (e.g., budgets), and industry averages. Significant differences or unexpected relationships identified through analytical procedures may indicate a risk of material misstatement, requiring further investigation.

Written representations are provided by management to confirm certain matters or support other audit evidence. While necessary, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal.

An IT environment significantly impacts audit evidence. The nature of evidence changes as transactions are processed and stored electronically, requiring auditors to rely on automated controls and data integrity. Timing may shift towards continuous auditing or more frequent reviews due to real-time processing. The extent of evidence often involves using Computer-Assisted Audit Techniques (CAATs) to test large volumes of data, analyze system logs, and verify controls. Auditors need specialized skills to understand IT systems and assess IT-related risks to obtain sufficient appropriate evidence.

External confirmation is audit evidence obtained as a direct written response to the auditor from a third party (the confirming party) in paper, electronic, or other media. It is highly reliable, especially for accounts receivable, bank balances, and loans.

Proper documentation of audit evidence is essential, as per SA 230, because it provides a record of the basis for the auditor's report and evidence that the audit was performed in accordance with SAs and applicable legal and regulatory requirements. It also facilitates planning and performance of the audit, supervision and review, and accountability. Key components include working papers detailing the audit procedures performed, audit evidence obtained, and conclusions reached. This encompasses analyses, memoranda, confirmations, representations, and schedules.

When using the work of management's expert, the auditor, as per SA 500, must evaluate the competence, capabilities, and objectivity of that expert. This involves considering the expert's professional qualifications, experience, and reputation, as well as any potential threats to their objectivity. The auditor must also obtain an understanding of the work of that expert, including the field of expertise, the nature of the work performed, and the methods and assumptions used. Finally, the auditor needs to evaluate the appropriateness of the expert's work as audit evidence for the relevant assertion.

External confirmation, as per SA 505, is used when the auditor requires direct written responses from a third party (the confirming party) to corroborate assertions about account balances, transactions, or other information. It is commonly used for bank balances, accounts receivable, accounts payable, and inventory held by third parties. Key considerations include determining the information to be confirmed, selecting the appropriate confirming party, designing the confirmation requests, and maintaining control over the confirmation process. The reliability of external confirmations can be affected by the integrity of the confirming party and the management's influence.